The Tax Code Equals Inequality

The System Is Unfair — Which Is Why We Dread This Day

Today is tax day. It is a day that most Americans, even those who don’t owe Uncle Sam money, dread. And with good reason, argues Chuck Collins, a senior scholar at the Institute for Policy Studies.

Collins makes the case to WhoWhatWhy’s Jeff Schechtman that what should make us mad is the way the current tax code allows the wealthy to protect — and even add to — their wealth.

Collins explains how this works, and then details what can be done to change it. He shows how some states are starting to make relevant adjustments to their tax schemes, and argues that at some point Congress will have to follow — because the American people will demand it.

Today is Tax Day. The day that most Americans dread. Even for those not owing money, the very idea of having to file taxes creates an uneasy, an unpleasant kind of anxiety. Taxes are simply the price we pay to live in a civilized society. Then why the anger? Is it that taxes are too high, the transparency of spending insufficient, the system too regressive, the enforcement too brutal, the over-complexity of the tax code, the unfairness of the system, or is it in large measure the many misconceptions about taxes that have become engrained in the American DNA? My guest Chuck Collins has written much about this subject. He is a Senior Scholar at the Institute for Policy Studies, and co-editor of Inequality.org. He is the author of numerous books about wealth and inequality. It is my pleasure to welcome Chuck Collins to Radio whowhatwhy. Chuck, thank you so much for joining us.

Chuck Collins: Thanks, Jeff, for having me.

Jeff: As we look at the tax code today and tax policy, as complex as it is, can we draw any kind of a clear line between tax policy and the inequality that I think everybody acknowledges that we are seeing in society today?

Chuck: I think we can because in the thirty years after World War II, from 1945 to 1975, we actually taxed wealth and income, particularly among the wealthiest, at much higher rates. We invested in investments that did big things, like built infrastructure, sent millions of people to college without debt, and built a generation of middle class homeowners. In the last over sixty years, but really in the last thirty years, we’ve dramatically reduced obligations on the richest One Percent, cut tax obligations on more global corporations and we shifted the burdens onto lower and middle income tax payers and smaller businesses. The pie has shrunk a bit and instead of taxing ourselves and paying for great things, we are borrowing, and basically just paying the bills.

Jeff: And in doing that, talk a little bit about how that results in the kind of inequality we see today. Where the wealthiest really make up a significantly powerful part of the population.

Chuck: Well, I think in the last thirty years we have seen a dizzying concentration of wealth at the very top. Since the great recession in 2008 almost all of the income and wealth gain has gone – not just to the One Percent at the top, but to the top one-tenth of one percent – and meanwhile at the same time tax obligations have continued to go down. It used to be if you were in the top one percent, we are a very progressive tax system – some people joke ‘under the socialist presidency of Dwight Eisenhower’, tax rates at the top, a wealthy person would pay somewhere around sixty percent of their income, where it’s several million dollars above that threshold. Today, effective tax rates have come down to under 25% of the top One Percent. What that concretely means is – and that’s what we know about it – because the very wealthy are now using more and more off-shore systems like the things being exposed in the Panama Papers and using trusts and other mechanisms to hide wealth from taxation. So considerable wealth that we used to invest in investments that lifted everybody up.

Jeff: How much of this is the result of corporations and wealthy individuals hiding money, off-shoring money, doing the things that we’ve seen in the Panama Papers, how much of it is the result of deliberate policy decisions that had the net result that you’re talking about?

Chuck: I think one of the things that happened is that the wealthy and global corporations in particular – we’re not talking about small businesses – deploy tax specialists and lawyers to help them reduce their taxes, game their taxes down – so a loophole industry, if you will. Public policy doesn’t catch up or doesn’t intervene. Basically the off-shore tax havens, like Panama, the British Virgin Islands. There’s a system of wealth escapes where congress has sat on its hands, has not taken action, has not raised the bar of disclosure or of transparency. So it’s a combination of both private practices and public policy makers kind of looking the other way that has brought us to the current situation.

Jeff: And in the efforts to try and bring this all back down to reality, do we need to look at the individual taxes, do we need to look at the complexity of the tax code itself? Or do we need to shift our focus, as some are saying, to really look at what’s going on with respect to corporate taxes?

Chuck: I think there are things that we can do to simplify the tax code, not lose the progressivity that still remains. For most individual taxpayers under incomes under $76,000, many people find it’s not that complicated. It’s when people have closely-held business interests or they have a lot of mechanisms to avoid taxes, and that’s when the tax code gets more and more complicated, more and more voluminous. Yeah, it’s because that loophole industry is lobbying for their special provision or tax break or accelerated depreciation bonus or whatever it is that they’ve got going. It does make sense to look at corporations. There might be a way in which we could greatly simplify corporate taxes and bring the rates down. The problem is, the most powerful corporations are actually paying zero, or incredibly little. We know that among the Fortune 500 companies the 288 most profitable pay an effective tax rate of about 19%. A bunch of companies like General Electric and Boeing and Verizon pay nothing. So there’s no tax reform that they’re going to like, that improves upon them paying nothing, except us paying them. So it’s going to be tough to institute tax reform when the most powerful interest groups actually are getting everything they want.

Jeff: What about tax reform in terms of the complexity of the tax avoidance schemes that you were talking about before? Those that are accessed by wealthy individuals, by those in the One Percent.

Chuck: In some ways there are some trusts and loopholes that could simply just be outlawed. We would have to retain vigil because the loophole industry, the lawyers and the tax attorneys that specializes in creating loopholes, are always going to try to be one step ahead of government. But many of them could be quite easily reformed. Certainly these rules that allow corporations to create shell corporations, that they don’t have to actually name beneficiaries, or they can create bank accounts where they don’t have to name beneficiaries, those are mechanisms that are created solely for the purpose of secrecy. And whether it’s to use exotic tax reduction techniques or to protect criminal activity, it’s really in no one’s interest to allow that to happen. So our congress could waive its wand tomorrow and require disclosure of beneficial owners and then push for treaties internationally to do the same and we could transform the system within a year if there was the political will of leadership.

Jeff: What exactly would that transform? What would that change, as you see it?

Chuck: What we have now is a kind of a shell[ ? ] where almost ninety countries compete on the basis of who will keep your secrets better, and if you just say across the board the United States is not going to do business with countries that don’t have fundamental transparency legislation when it comes to banking and incorporation, then those countries will have to decide whether they want to participate, be connected to the largest economy in the world or not. And then ultimately, fundamentally, have to reform. So that’s one thing. What it means is that wealthy people, some of the escape valves will close and people will have to be more accountable and pay their taxes and have this income, that’s been hidden off the balance sheet, come back on the balance sheet. The good news is there’s actually call it ‘the movement of wealthy people bringing their wealth home’. There are actually people who are renouncing the off-shore system, wealthy people who are making the choice not to use these trust mechanisms, they’re not playing the shenanigans and games. They recognize everybody should pay their fair share. That’s what good societies do. But at this point they’re in the minority.

Jeff: Do we need to be looking at the effective rate of taxes?

Chuck: Yes, effective rate is simply what it is that people actually pay. So we can have a tax rate like we do… We have a corporate tax rate of 35%. We’ll hear people say the reason why these corporations are going off-shore is because the United States has the highest corporate tax rate in the world. But that’s the rate that’s sort of advertised. The real effective rate or the average effective rate, the actual percentage that people pay. US corporations are paying [?%] and the really big corporations are paying under 20%. The key question is ‘what’s the effective rate?’ What is it that people are really paying? Because that’s what tells the post-loophole story.

Jeff: One of the things we hear, it seems that every single election cycle from some candidate is talk about basically pulling up the system by its roots and instituting either some kind of flat tax, some kind of value-added tax as in many European countries. Talk about that, about various suggestions that come up periodically.

Chuck: Pretty much consistently over thirty years there have been people who advocate for flat tax, which is deceptively simple and what I would say is that many of those proposals are quite regressive, meaning that low income people end up paying a higher percentage of their income than the very wealthy. They also typically don’t bring in sufficient revenue for all of our obligations. We can each [ ? [ that the government does which we’d rather they didn’t, you know, building an F35-Fire plane that will never be used or wasteful government programs. We all can think of those things but the reality is, we have a lot of obligations in terms of retirement, security, Social Security, Medicare, building infrastructure, keeping our national parks open, so those proposals are kind of stalking horses for shrinking government and that is often the agenda behind it. Here’s what I would say about flat taxes. I think we could flatten out the income tax rate considerably by eliminating a lot of these loopholes for people at the top. If people at the top actually paid closer to the effective rate 30%, not use all these loopholes, then we wouldn’t have to have such a complex system. If you look at, Jeff, tax obligations of most people, if you add together federal taxes, state and local taxes, most people pay roughly 20% -25% of their income in state, local and federal taxes. If you make the federal tax flat you will reduce the share that the wealthy pay to maybe 50% and everybody else will pay at that 25% of their income level. Meaning that the federal tax is still progressive and offsets the regressive at the local level. So we sort of already have a flat tax system for people who want that.

Jeff: Is the tax code a good mechanism to be using to try address some of these broader issues of wealth and inequality in the country?

Chuck: I think that it is indirectly. I would argue that what we should be thinking about is on the investment side. What are the kinds of thing we could do to reduce inequality of opportunity and is there a way to link revenue together. So for example, in the thirty years after WWII, we taxed the wealthy and invested in debt-free higher education and forty-year fixed-rate mortgages for a huge percent of the population to be able to buy houses. So there was an example of taxing wealth and investing in a way that expanded

opportunity for the middle class and greatly reduced inequality. I would say we should use that playbook again. Tax financial transactions, invest in early childhood education. Tax estates of wealthy millionaires and billionaires, invest in debt-free education. Together, reducing the concentration of the wealth at the top and using the revenue to lift the floor, and create opportunity. The tax code is part of that puzzle.

Jeff: Of course, to do anything about the tax code, given the campaign finance situation, seems very unlikely. The two seem very tied together.

Chuck: Yeah, I think right now if you want to propose these things there would be non-starters in the current congress because it is essentially captured by big money. What we’re seeing is, at the state and local level, states are not waiting around and are stepping in to… In Massachusetts where I live, there’s a ballot initiative to institute a millionaire tax. California, as you know, some more, New Jersey, a number of states are instituting state-level progressive taxes and linking it to things that matter. Washington State, they taxed wealthy estates and that money is linked to education at the state level. So we don’t have to wait around. There are things that we can do at the local level.

Jeff: Is this going to result in a kind of tax shopping that goes on as we see more disparity between states in terms of what their tax policy is?

Chuck: It does and it doesn’t. States that have relatively high tax rates also have much better public services. So if you are a business you might think twice before relocating to a low tax state because you’re not going to have the infrastructure and amenities. People realize you sorted, get what you paid for, or you don’t get what you don’t pay for. That’s another reason why, ultimately, we need to have a fair tax code so we don’t pit states against each other. Again, after World War II, we used to tax the wealthy and the federal

government shared revenue with the states. And the states did more sharing revenue with

municipalities. The money flowed down to localities. And we’re almost at a reverse process now. We stopped taxing the wealthy, states are keeping the revenue. There is very little sharing with states, and towns, cities, don’t get much help from the states which leads them to all kinds of creative revenue schemes, like arresting your own people and giving them tickets, putting them in jail so you can raise your municipal budget. So you see more and more towns going in that direction.

Jeff: States would tell you and even some municipalities that it is the amounts of unfunded mandates that come from the top that really creates the need to keep the revenue in the state.

Chuck: That’s true and it’s a fair complaint and it’s another example of why the federal government if they’re going to mandate things needs to tax and invest it, put their money where their mouth is.

Jeff: In your work, finally, are you seeing any momentum towards, any kind of bipartisan talk about really addressing some of these tax issues?

Chuck: I think at the national level everybody would acknowledge there needs to be some fundamental tax reform similar to 1986. You had Reagan and a Democratic congress basically rewriting the tax code, closing a tremendous number of loopholes and inefficiencies. I think that people do go back to look at that as an example. I do see the momentum at the state level for progressive reform. And then, the voters are ready. Polls show that the voting public supports taxing millionaires, storing the progressivity of the tax system, closing the off-shore system, by a wide margin, 78% of the electorate supports those kinds of tax reforms. So at the base, if you will, at the basic voter level, people are ready for those changes, and so at some point the pressure will build for some kind of realignment. Some kind of response to that.

Jeff: Chuck Collins. He’s a Senior Scholar at the Institute for Policy Studies. He is the co-editor of Inequality.org. Chuck, I thank you so much for spending time with us today at Radio whowhatwhy.org.

Chuck: Thanks, Jeff.

Jeff: Thank you. And thank you for listening and joining us here at Radio whowhatwhy.org. I hope you’ll join us next week for another Radio whowhatwhy podcast.

I’m Jeff Schechtman. If you liked this podcast, feel free to share it and help other people find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/Donate.